Lower price isn’t always cheaper

David MoonBlog

This past week Dollar Tree announced it was acquiring rival Family Dollar in a deal worth $8.5 billion.

Selling stuff for a buck is obviously profitable.

The transaction is a perfect example of the Moon Affordable Small Packages Fallacy and Moon Paradox of Poverty, both of which I created this week.

The Affordable Small Packages Fallacy describes the inverse relationship between the size of a product’s package and the gross margins it provides a retailer.

That is, pizza is more expensive by the slice. And a one-dollar, 24-ounce bottle of ketchup is more expensive than a four-dollar, 114-ounce tub.

For various reasons, customers at dollar stores often focus on per package pricing (a dollar!) rather than volume pricing. Items like soda, canned goods, toothpaste and pasta are often more expensive per volume at dollar stores than at traditional retailers. So are many children’s school items (pencils, notebooks, folders, pens, etc.) and non-food kitchen items, such as sandwich bags.

Just because the price is lower doesn’t mean that it’s cheaper.

Therein lies an example of the Paradox of Poverty. Poor people generally pay more for common products than do non-poor people.

There is a store near my house that sells individual, single cigarettes. I’m going to guess that the singles work out to a higher per puff price than a carton. (I’m also going to guess that it violates at least a half dozen laws and regulations, but no one in my neighborhood seems to care.)

Single beers cost more than a case. So do small containers of milk. Poor people pay more to borrow money.

It is expensive being poor. When I get a speeding ticket, I can pay it. A speeding ticket for a poor person is often the beginning of an irrecoverable multi-year process that includes the accumulation of more fines and a loss of license.

Some people buy the more expensive products at the dollar stores because they don’t know any better. Some are geographically limited where they can shop.

But some significant percentage of people shop at these stores because their cash flow doesn’t allow for bulk purchases—even if “bulk” is only the 90 ounce difference in the size of a ketchup bottle.

The chicken-and-egg nature of the Paradox of Poverty is tempting to ignore. Is the decision to shop inefficiently a result of being poor or the cause of it?

A simpleton’s solution is an exercise in values identification, where a consumer ranks his monthly purchases by importance, then assigns an economic value for each item above which he will not pay.

I call this Bobby Denton Resource Allocation; pay this price and pay no more.